Is Stelux Holdings International (HKG:84) Using Too Much Debt?

David Iben put it well when he said, 'Volatility is not a risk we care about. What we care about is avoiding the permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. We note that Stelux Holdings International Limited (HKG:84) does have debt on its balance sheet. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. Part and parcel of capitalism is the process of 'creative destruction' where failed businesses are mercilessly liquidated by their bankers. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. The first step when considering a company's debt levels is to consider its cash and debt together.

Check out our latest analysis for Stelux Holdings International

What Is Stelux Holdings International's Debt?

You can click the graphic below for the historical numbers, but it shows that Stelux Holdings International had HK$234.0m of debt in March 2024, down from HK$342.8m, one year before. However, it also had HK$88.7m in cash, and so its net debt is HK$145.2m.

How Strong Is Stelux Holdings International's Balance Sheet?

We can see from the most recent balance sheet that Stelux Holdings International had liabilities of HK$437.7m falling due within a year, and liabilities of HK$78.6m due beyond that. Offsetting this, it had HK$88.7m in cash and HK$147.8m in receivables that were due within 12 months. So its liabilities total HK$279.8m more than the combination of its cash and short-term receivables.

This deficit casts a shadow over the HK$90.6m company, like a colossus towering over mere mortals. So we definitely think shareholders need to watch this one closely. At the end of the day, Stelux Holdings International would probably need a major re-capitalization if its creditors were to demand repayment. The balance sheet is clearly the area to focus on when you are analysing debt. But you can't view debt in total isolation; since Stelux Holdings International will need earnings to service that debt. So when considering debt, it's definitely worth looking at the earnings trend. Click here for an interactive snapshot.

In the last year Stelux Holdings International had a loss before interest and tax, and actually shrunk its revenue by 4.7%, to HK$768m. We would much prefer see growth.

Caveat Emptor

Over the last twelve months Stelux Holdings International produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at HK$7.2m. Combining this information with the significant liabilities we already touched on makes us very hesitant about this stock, to say the least. That said, it is possible that the company will turn its fortunes around. But we think that is unlikely, given it is low on liquid assets, and burned through HK$31m in the last year. So we think this stock is risky, like walking through a dirty dog park with a mask on. The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately, every company can contain risks that exist outside of the balance sheet. For instance, we've identified 2 warning signs for Stelux Holdings International (1 makes us a bit uncomfortable) you should be aware of.

At the end of the day, it's often better to focus on companies that are free from net debt. You can access our special list of such companies (all with a track record of profit growth). It's free.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.